Autumn statement 2012: The reduction in the annual and lifetime pension allowance contributions could impact on more savers than the 2% it is aimed at.
The Chancellor George Osborne announced that from 2014-15 the annual allowances will reduce from £50,000 to £40,000 and the lifetime allowance will be reduced from £1.5 million to £1.25 million.
In the Autumn Statement he said that the measure will affect the top 2% of savers approaching retirement as 98% of savers have a pension pot worth less than £1.25 million.
However, Liam Mayne, senior pension consultant at Aon Hewitt cautioned that previously the annual allowance was targeted at those paying additional tax rates. But with the annual reduction down to £40,000 it brings into scope those paying 40% tax.
He added that the lifetime allowance could also become an issue for savers when they near retirement if they experience decent investment returns on a pension pot. This could casue them to exceed the lifetime allowance.
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Mayne added that government changes to allowances also impacts on savers’ confidence in pension schemes.
“I think it undermines the stability of the pension system. We had a change in 2006, 2009, 2010 and 2012. The government has shown no commitment to a stable pension tax system so if you are a saver who is able to save a decent amount you are going to wonder if pension schemes are a good place to save your money. Particularly with the lifetime allowance coming down from £1.8 million to £1.25 million in nearly three years, that’s nearly a 33% drop.”
Of course, we recognise that the government has a difficult task to improve our economic position. But it’s extremely disappointing that pensions should once again bear the brunt of legislative changes. The further restriction to the annual allowance will hit more than just the wealthy. It also hits many of those who are members of good final salary schemes and, in addition, those who have left it late to save for their retirement. This second group includes entrepreneurs and others whose primary focus is to build their own business, and who now may have much less to live on in retirement than they planned.
Targeting this incentive to long-term saving is a blow for savers, but it is important to remember that pensions tax relief continues to offer savers unbeatable value.
Topping up their pension payments before the legislation comes into effect, and utilising carry-forward where applicable will enable people to make the most of their pensions contributions.
We are disappointed that the Chancellor has announced a cut in annual pension tax relief from £50,000 to £40,000. It is concerning that the government continues to tinker with pensions at what is a crucial time for pension saving in the UK. With initiatives such as automatic-enrolment beginning in earnest it is vital that pensions are seen to be attractive savings vehicles as we attempt to tackle the huge projected UK shortfall in retirement saving. Therefore the government should support pension saving wherever possible.
While we understand the economic and political reasons behind the Chancellor’s decision to reduce the tax free allowance for pension contributions from £50,000 to £40,000 and cut the lifetime allowance from £1.5 million to £1.25 million, we feel this move may have a negative impact on the wider pensions industry who are currently being encouraged to save more for retirement. With annuity rates reaching historic lows, and the FSA having lowered long-term return expectations significantly, it is essential we work towards recreating the savings culture in the UK and encourage people to save more into their pension pot.
Restricting the ability for people to contribute appears to contradict the auto-enrolment initiative to reinvigorate pension saving and is yet another rule change for consumers to get their heads around. Auto-enrolment was introduced because people in Britain simply aren’t saving enough for retirement, so penalising those save hard for their long-term financial security does not seem fair. The government should be encouraging us to make higher contributions, not putting us off from saving more through these cuts in tax allowances.
Making changes to pensions tax relief to help pay off Britain’s debts will send a confusing message at a time when it’s absolutely critical we get the nation’s workers putting adequate money aside for their retirement. Automatic enrolment will get millions more people saving into a pension, and it’s essential that we create a sense of urgency that people need to start saving now.
Changing the pensions tax relief allowance will simply send the wrong message about how important it is for people to take active responsibility for their retirement planning. Such a change will introduce more disruption and complexity to the pensions system at a time when it least needs it.
We’re surprised to see a drop in the lifetime allowance and we will need to consider the impact this will have on Britain’s savers. Building awareness about how much people need to save for the retirement remains a priority for our industry, and for the majority of people that means putting more money into their pension.
We are disappointed that the Chancellor has continued to meddle with the pension tax regime by reducing the tax-free cap for pension contributions to £40,000 and restricting the lifetime allowance for tax-advantaged pension pots from £1.5m to £1.25m.
If the government continues to tinker with pension tax relief, the danger is that savers could be put off saving into a pension altogether or, worse still, choose not to save at all. We hope the Chancellor will leave pensions alone so prudent savers can be reassured that the goal posts will not simply move again. The government should get back to really supporting the virtues of personal responsibility and thrift.
Constant tinkering with the pensions system builds more distrust and apathy towards saving for retirement. We need stability in the pensions system to allow employers and employees to plan their arrangements accordingly. For example, contrast the trust in ISAs with trust in pensions – with the exception of increasing ISA limits, regulation on them has been steady for years and we’ve seen huge enthusiasm for them as a result. Ever changing pensions have seen the opposite happen.
Taking the annual allowance to £40,000 is another example of bringing in a change far too soon – the pensions industry has just spent three years implementing the last change on thresholds in 2009 resulting in significant work amending pension plan design and communicating with individuals.
For companies, these changes will be a further disruption and a hassle, which many don’t need. Constantly changing the system will undermine trust in pensions and companies’ desire to invest time and resource into them.
Individuals affected by today’s announcement will welcome its 2014/15 introduction as it at least provides some opportunity for them to plan accordingly.
Reducing the lifetime savings allowance from £1.5 million to £1.25 million will significantly decrease the attractiveness of pensions. Based on current rates a pensions pot of £1.25 million buys an annuity of around £35,000, which is significant but by no means a luxurious retirement.
Every time a Chancellor tinkers with the rules governing our pensions, they undermine investors’ confidence in saving for their retirement. The announcement is robbing our future prosperity in order to bail out the costs of past mistakes.
These reductions further complicate retirement planning for high savers. This is bound to catch out high earners with career breaks and entrepreneurs who may try to fund their retirement after establishing their business.
Another key consequence is that this brings more complexity around fixed, primary and enhanced protection and could signal another round of complicated protection legislation.
Savers affected by this change who have not used all their annual allowance in the previous three tax years may want to consider using this unused relief in that year, a process called carry forward. Savers must have sufficient earnings to obtain tax relief on this amount and must be aware of the effect of the lifetime allowance.
George Osborne indicated that 99% of pension savers make annual contributions to their pensions less than £40k. However, for many entrepreneurs, the business is their pension fund. Someone who spends 20 years building a business with the intention to sell and put the proceeds into a pension should not be taxed more than someone who has saved the same amount through 20 years of small pension contributions.
It is deeply disappointing that the Chancellor felt the need to make further changes to the tax relief available on pensions. The previous reduction in the annual allowance to £50,000 is still bedding in. We already knew before today’s statement that the Finance Bill 2013 will contain legislation to ensure that the first change made back in April 2011 will work as intended. Now companies and individuals will need to get to grips with the new proposals.
It is important to remember that the changes to the annual allowances won’t just affect those who we traditionally think of as high earners. For example, a long-serving member of a defined benefit scheme promoted to a salary of £50,000 could easily find themselves hit by an additional tax bill of £4,000.
When the current taxation regime was originally implemented it was presented as “simplification”, with everybody following the same rules. But we already have the complexity caused by many different kinds of transitional protection and the Chancellor has just announced a further two new protections (“fixed protection 2014” and “personalised protection”) which will compound the problem.
The key now is to make implementation as painless as possible. The Treasury and HMRC need to issue guidance as a matter of urgency and help schemes and individuals manage the transition as smoothly as possible.
This change has been framed as hitting the wealthy only, but it could affect many in the public sector pension scheme or defined benefit schemes in general. It will also impact many middle-aged, middle earners who can only effectively save for retirement in their later years.
In 2010, the Government said that a £50,000 annual allowance would give people ‘greater flexibility’ over when they do their pension saving and would ‘impact on fewer individuals on lower incomes’ than the lower allowance figures it had been contemplating. It’s equally obvious that a lower annual allowance will now catch more people on five, rather than six, figure salaries in final salary schemes, including public sector employees whose accrued pensions remain linked to final salary, and will make it harder for members to catch up on pension saving later in life when they have the money to spare.
The Chancellor’s comment in March that he would not be restricting tax relief ‘in this Budget’ turned out to be ominous. It’s understandable that the Treasury wants to keep its options open but pension planning would be easier if there was a firm signal that a third bite will not be taken out of this particular cherry.
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